Under an SEC order issued today, it will require considerably more wealth or assets for an investor to qualify to pay an investment adviser performance fees. The higher thresholds, mandated by Dodd-Frank reform, are meant to take inflation into account and will go into effect September 19.

Advertisement

Under an SEC order issued today, it will require considerably more wealth or assets for an investor to qualify to pay an investment adviser performance fees. The higher thresholds, mandated by Dodd-Frank reform, are meant to take inflation into account and will go into effect September 19.

Under the new order, the client must have at least $1 million under the management of the adviser, or a net worth of more than $2 million before an investment adviser can charge performance fees. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.

Performance fees typically hover around 20 percent and are primarily the province of hedge funds and other asset managers; investment advisers who focus on providing wealth management and planning services to individual high-net-worth clients rarely charge clients performance fees. According to data gathered by the Investment Adviser’s Association from form ADVs, some 3,233 investment advisers out of a total of 11,643 charged performance fees as of April 2010. That is up from 1,493 who charged performance fees out of a total of around 7,000 in 2001. Meanwhile, approximately 11,110 of that total charged AUM-based fees in April of 2010.

“Part of it, without a doubt, is the fact that a significant number of hedge fund advisers have voluntarily registered with the SEC during the past several years,” said David Tittsworth, executive director of the IAA, referring to the growth in the number of RIAs who charge performance fees.

Under Dodd‑Frank, the Commission was required to issue an order to adjust these thresholds for inflation by July 21, 2011 and every five years thereafter. The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.

The Commission had also proposed excluding the value of a person's primary residence from determination of the client's net worth standard. That is still under consideration.

Consumer Group Drops Opposition To SRO For Investment Advisers

In other regulatory news, the Consumer Federation of America, a staunchly pro-consumer group, said publicly Tuesday that it would no longer oppose having an SRO help the SEC oversee investment advisers. The CFA has fought tooth and nail to get more money for the SEC to do its job of regulating investment advisers, but in testimony before the Senate Banking Committee, Barbara Roper, the CFA’s head of investor protection, said she does not now expect that will happen. "We have concluded that a properly structured SRO proposal would be a significant improvement over the status quo," said Roper.

FINRA has been very vocal about the fact that it would like to be the SRO for investment advisers, and has stepped up its enforcement and disciplinary functions this year to show it has the mettle to do more. But there are other candidates for the job as well.

“The way I read her statement was that they still believe it is optimal for the SEC to have adequate resources to do its job,” said Tittsworth in response. “There are a variety of ways you can get there. One is user fees, which were identified as one option in the SEC’s 914 staff report.”

Practice Management Webinars and White Papers

What does it take to lead a high performing team? Are you seeing the kind of ROI from your next gen advisors that you need to? Do you know what you need to do to ramp up next gen performance quickly and efficiently? There are ways to support the efforts of your next gen team to be more productive in less time, but you have to know the secrets to leading a high performance team....More

Specialization is critical for advisors looking to differentiate themselves—with their firms and with their clients. But how do you go about matching your strengths with a specialty that truly interests you, and fits your talents?...More

Millennials stand to inherit $41 trillion but will any inherit you? Don’t assume you can work with the Millennial children the same way you did their parents. Learn what each generation is looking for in an advisor in this white paper....More

Top financial advisors like you are continually looking for ways to protect and strengthen their practice. Attend our webinar to learn about four best-practice pillars for building a solid foundation for your practice....More